Question

Nachman Industries just paid a dividend of D0 = $3.75. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?

Answer #1

Required rate= | 9.00% | ||||||

Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |

1 | 3.75 | 30.00% | 4.875 | 4.875 | 1.09 | 4.4725 | |

2 | 4.875 | 10.00% | 5.3625 | 140.766 | 146.1285 | 1.1881 | 122.99343 |

Long term growth rate (given)= | 5.00% | Value of Stock = | Sum of discounted value = |
127.47 |

Where | |||

Current dividend =Previous year dividend*(1+growth rate)^corresponding year | |||

Total value = Dividend + horizon value (only for last year) | |||

Horizon value = Dividend Current year 2 *(1+long term growth rate)/( Required rate-long term growth rate) | |||

Discount factor=(1+ Required rate)^corresponding period | |||

Discounted value=total value/discount factor |

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